Offering promotions, sales, and discounts is a strategy nearly every business uses at some point to boost revenues, attract customers, and clear inventory. Discounted pricing can be tremendously effective at driving short-term sales results when planned and executed thoughtfully.
However, overreliance on discounts can also dilute your brand image and squeeze profit margins over the long run. In this post, we’ll weigh the potential advantages and drawbacks of discounting so you can make smart decisions about promotional pricing for your unique business.
Why Offer Discounts to Customers?
Despite the risks, there are compelling reasons why temporarily discounted pricing makes sense for many businesses. Offering promotions or sales can achieve meaningful benefits that directly impact your bottom line.
Discounts remain one of the most tried-and-true ways of quickly stimulating consumer purchasing behavior. The right promotion at the right time can deliver an immediate spike in orders and revenue for your business. There are both offensive and defensive motivations why you may choose to offer discounted pricing.
5 Reasons to Offer Discounts to Customers
Increased Traffic
Launching a temporary discount or promotional offer is proven to drive increased traffic to your business. Promoting the deal through advertising and marketing channels attracts new visitor attention. Time-limited discounts also create a sense of urgency that incentivizes customers to act quickly before the promotion expires. Driving this influx of interested traffic is one of the primary motivations for offering discounts.
Increased Sales
Increased traffic typically translates directly into increased sales during the promotional period. Discounted pricing makes purchasing more affordable and compelling for consumers on the fence. Lower prices can be the extra nudge customers need to finally make a purchase. Promotions also encourage existing customers to buy more than they normally would to take advantage of the temporary deals.
Sales Targets Are Met
Discounts can be an effective strategy for helping ensure your business hits its revenue goals consistently. Sales are subject to seasonal ebbs and flows for most businesses throughout the year. Strategic discounting during slower periods counteracts dips and helps smooth your sales performance. Promotions also motivate customers to buy sooner rather than wait during already busy sales cycles.
Stronger Client Relationships
Offering customers exclusive or limited-time savings demonstrates that you value existing relationships. It shows an understanding that pricing is a concern and you are willing to provide assistance. Delivering meaningful discounts fosters greater brand affinity and loyalty with your customers.
Monetized Inventory
Promotional pricing allows you to turn slow-moving, obsolete, or excess inventory into immediate revenue. Rather than letting assets and products go to waste or expire, discounts motivate customers to purchase more than normal. This monetizes inventory that may be difficult to sell otherwise.
Related: How to Calculate Wholesale Price From Retail Price?
Types of Discounts Offered to Customers
There are countless different types of discounts businesses leverage to drive results. The specific benefits and potential drawbacks vary widely depending on the structure of the promotion. Some discounts reward loyalty, others attract new customers, some aim to liquidate inventory, and some match competitor pricing temporarily.
Here are some of the most frequently used types of discounts offered by businesses today.
Buy One, Get One Free (BOGO)
BOGO discounts entice customers by giving them two products for the price of one. The extra free item incentivizes larger purchase quantities.
Contractual Discount
Contractual discounts are negotiated discounted prices offered to specific customers outlined in contracts.
Early Payment Discount
Businesses offer discounted pricing if customers pay their bill earlier than the normal due date. This improves cash flow.
Free Shipping
Free shipping discounts remove the shipping costs from an order. This makes purchasing online more affordable.
Order-Specific Discount
Order-specific discounts are one-time percentage or dollar discounts applied to a single customer order.
Price-Break Discount
Price-break discounts reduce pricing once customers exceed a specified purchase quantity threshold.
Seasonal Discount
Seasonal discounts aim to boost sales during slower selling seasons or holiday periods with lower prices.
Trade Discount
Trade discounts are exclusive discounted pricing offered by manufacturers, wholesalers, and suppliers to distributors and retailers.
Trade-In Credit
Trade-in credits offer customers a discount when they trade in an old item to upgrade to a newer model.
Volume Discount
Volume discounts reduce pricing for customers that purchase products above a certain minimum order quantity or value.
Percentage Discounts
Percentage discounts offer customers a percentage off the total cart value, product price, or service cost.
Cash Discounts
Cash discounts reward customers with lower pricing for paying with physical cash rather than credit.
Quantity Discounts
Quantity discounts reduce per unit pricing as the total number of units purchased increases.
Promotional Discounts
Promotional discounts are temporary percentage or dollar discounts used to boost sales during slow periods.
Loyalty Discounts
Loyal customers get exclusive discounted pricing through loyalty programs and subscriptions to incentivize repeat business.
Cash Back Offers
Cash back offers reimburse customers a portion of a purchase price after the transaction is complete.
Free Gifts
Free gift promotions give customers free products as an incentive for purchasing certain items or spend thresholds.
First-Time Buyer Discounts
First-time buyer discounts provide an extra incentive for customers to try out a business for the first time.
Overstock Sales
Overstock sales liquidate extra inventory, leftovers, and slow-selling products by marking down prices.
Price Bundling
Bundled pricing combines multiple products together into a single discounted package deal. This encourages larger purchases.
Referral Discounts
Referral discounts reward existing customers for promoting the business to new customers through word-of-mouth sharing and recommendations.
Email Subscription Discounts
Email subscription discounts offer savings for customers willing to share their email address and opt-in to marketing messages.
Pros of Offering Discounts to Customers
While discounts can certainly present downsides if overused, there are also many potential benefits to strategic promotional pricing. When thoughtfully planned and properly promoted, discounts can deliver meaningful advantages that directly impact your small business’s bottom line.
Savvy use of discounts provides businesses an additional lever to influence customer purchasing decisions. The right promotion at the opportune time can attract new customers, drive add-on sales from existing buyers, hit revenue goals, and turn slow inventory into immediate sales.
Here are some of the biggest advantages and pros of offering discounts.
Increased Sales
Offering discounts or promotional pricing often directly results in a noticeable boost in sales and orders during the promotional period. Lower prices make purchases more affordable and attractive for customers. Discounts incentivize customers to buy now rather than wait. Time-limited discounts can create a sense of urgency. Providing discounts on multiple products or items can encourage customers to buy more in order to maximize the value of the promotion.
Attract New Customers
Discounts are effective at catching the eye of new customers who may not have purchased from your business before. Promotional pricing provides a compelling incentive for new customers to try out your products or services for the first time. Discounts allow you to attract new customers away from competitor businesses. New customers acquired through discounts and promotions can turn into loyal repeat customers if you provide excellent service and value.
Boost Customer Loyalty
Offering exclusive discounted pricing, perks, or personalized promotions to existing loyal customers makes them feel valued. It strengthens loyalty and encourages repeat business. Loyal customers appreciate being rewarded for their continued patronage. Surprising customers with a discount or coupon inspires gratitude and brand appreciation. Discounts help businesses stand out from competitors in the minds of loyal customers.
Clear Inventory
Discounting enables businesses to convert slow-moving, excess, or obsolete inventory into immediate sales revenue by marking down prices. Rather than letting old inventory continue occupying storage and shelf space, discounts motivate customers to buy discounted items, helping clear out less desirable inventory. Strategic discounts can assist with inventory management by stimulating demand for specific products that have accumulated. This frees up cash flow that is tied up in stale inventory.
Test New Products
Offering limited-time discounts allows businesses to experiment with introducing new products to customers at lower risk. Discounted introductory pricing helps attract early adopters and buzz for trying a new product. Customers are more willing to purchase and test out a new product if the price has been temporarily marked down. Product launches can fail if the new item is priced too high. Promotional pricing enables businesses to find the optimal price point for maximizing sales of new products.
Compete With Other Businesses
Matching competitor discount pricing can be necessary in the short term to remain competitive and retain customers. Customers may choose to shop elsewhere if your prices are higher than competitors’ during promotions. Running aligned discounts enables you to protect your market share. You can also use strategic discounting to undercut competitor pricing to make temporary gains. However, competing solely on price discounts is not sustainable long-term. Discounts should be combined with reinforcing your product/service value.
Increase Online Traffic
Promoting discounts and sales online is an effective tactic for drawing increased visitors to your website, social media pages, online ads, and other digital assets. Customers actively seek out discounted pricing online. Highlighting percent-off or dollars saved prominently across your online presence grabs attention. Driving online traffic enables you to reach and convert a broader audience. You can further boost traffic by promoting discounts through email, text messages, and other channels.
Encourage Larger Purchases
Discounts motivate customers to buy more items or higher value products and services to maximize the amount of savings. Customers will fill up their carts and increase order values to take full advantage of percent-off or buy-one-get-one (BOGO) promotions. Creative bundled discounts also incentivize customers to spend more to unlock higher discount tiers. Discounts make high-end purchases more affordable. Upselling is easier when customers feel they are getting a deal.
Improve Cash Flow
In the short term, discounts and promotional pricing can improve business cash flow and liquidity by accelerating customer purchases and payment timing. Discounts make offers more attractive, so customers buy sooner before a promotion expires. Prompt payments from increased sales then boost cash balances and working capital. However, discounts also reduce profit margins. There needs to be a balance between cash flow speed and long-term profitability.
Create Buzz
Unique, exciting discounts and promotions can generate positive word-of-mouth and social media buzz about your brand. Creative discounts pique customer interest and inspire sharing with friends and followers. Strategic partnerships with influencers and celebrities to offer special co-branded discounts also gain widespread attention. Viral promotion expands your reach. Buzz drives awareness, foot traffic, and sales.
Cons of Offering Discounts to Customers
While discounts can boost sales and attract new customers, promotional pricing also comes with risks and potential disadvantages that must be considered. Ill-planned discounts can easily end up eroding profit margins without delivering meaningful benefits. Businesses should not view discounting as a cure-all marketing tactic. There are strategic times when discounts make sense, and scenarios when they should be avoided.
It is important to weigh the cons against the pros before offering widespread discounts. Potential downsides include reduced profit margins, conditioning customers to wait for sales, devaluing brand perception, and wasting money on discount shoppers who will never become loyal customers. Discounts should be targeted and supported by analytics. Blind discounting can quickly spiral out of control.
Below are some of the key disadvantages and cons to be aware of when developing discount programs and promotions.
Reduced Profits
Offering discounts directly reduces profit margins earned on any discounted items or services. This erosion of per-unit profitability can significantly diminish overall earnings if discounts are too steep or offered unselectively. Businesses must carefully analyze if the increased sales volume from discounts outweighs the drop in per-item profits. Blind discounting often fails to deliver sufficient incremental revenue. There needs to be a plan for recapturing lost profitability after discounts end.
Can Be Abused by Customers
Savvy customers will learn to time their purchases only when discounts are active. This can train customers to ignore regular pricing. Some buyers will find ways to continuously qualify for repeat discounts through referrals or other means. Customers may falsely claim to be eligible for unpublished promotional pricing. Strict terms and oversight are required to prevent discount abuse.
Can Lead to Price Wars
Competitors often feel forced to match discounts to remain competitive. This can kick off spiraling price wars as each business offers steeper and steeper promotions. Sustained price wars damage the profitability of all competitors. Discounting should be strategic and limited to avoid continuously falling prices.
Can Damage Brand Image
Frequent discounts can make customers perceive that a brand’s regular prices are inflated if they are always later reduced. It implies the normal prices are unfair. Luxury and premium brands need to be especially careful with discounting to avoid diminishing their brand image.
Can Be Difficult to Manage
There are many complex factors in managing discounts, including eligibility requirements, applicability across products/locations, promotion caps, timing/duration, legal terms, taxes, and more. Poorly structured discounts can create confusion that diminishes their impact. Extensive overrides may be required at checkout. Updates across all selling channels presents challenges.
Short-Term Customer Loyalty
Customers attracted mainly by discounts will only remain loyal temporarily during the promotions. Their loyalty to the brand itself has not been built. Once discounts end, fickle bargain hunters will chase the next deal elsewhere. Sustainable loyalty requires reinforcing value beyond discounts.
Overcrowding and Service Delays
Popular discounts can make locations suddenly far busier during promotions. This risks deteriorating the customer experience through long waits, stock outs, cluttered displays, and stressed staff. Adequate staffing and inventory is crucial to handle discount volumes.
Strain on Inventory and Supply Chain
Increased sales from discounts can outpace normal inventory and supply chain capacity. Outages and stockouts reflect poorly on the brand. Backup supplies and vendor arrangements help ensure sufficient inventory availability during promotions.
Potential Loss of Perceived Value
Customers who buy items at a deep discount may attribute less value to those products afterwards based on the lower price paid. They will be less willing to pay full price again later. This makes it very hard to return to regular pricing. Gradual discounts are better.
Attract Bargain Hunters Over Loyal Customers
Big discounts often attract deal-focused shoppers rather than brand loyalists. These bargain hunters only stick around until the next discount from a competitor. Fickle discount chasers yield less lifetime value than loyal customers. Their online reviews may also unfairly skew negative later.
Risk of Profit Loss if Overused
Relying too heavily on discounts will steadily eat away at profitability. If a business becomes dependent on promotions and unable to sustain regular pricing, overall profits will spiral downward. Any overuse of discounts must be corrected before it permanently damages earnings.
May Undermine Regular Pricing Strategy
Frequent discounts can sabotage the business’s regular baseline pricing and positioning. Customers will hesitate to buy at regular prices. Your pricing integrity declines. Any regular pricing raises later will face resistance after discounts.
Potential Conflicts with Price Discrimination Laws
Some conditional discounts based on customer traits like age or location can violate pricing discrimination laws. Strict legal compliance is essential when structuring targeted promotional offers to avoid lawsuits.
Anger Customers Who Recently Paid Full Price
Soon after a major purchase, a new discount can frustrate customers who just paid higher regular pricing. Good customer service involves considering some form of conciliation, like refunds for recent full-price buyers.
Hard to End Discounting
Customer addiction to discounts makes it very difficult to revert to regular pricing. Walking back pervasive promotions must be done gradually to avoid severe revenue decline. Communicating the reasons for ending discounts is critical.
May Not Impact Customer Behavior
There is no guarantee that discounts will change customer behavior in the long term. Initial sales gains may dwindle after promotions conclude. Discounts should be targeted based on analytics insights into optimal consumer response.
Wrap Up/Conclusion
In closing, discounts and promotional pricing are not inherently good or bad. Context and strategy matters. Thoughtful discounts integrated into the marketing mix can drive growth and acquire loyal fans. But reckless across-the-board discounting quickly erodes brand value and profits.
The most successful brands limit discounts in favor of reinforcing product quality and prestige. Each business must weigh its own objectives, customer psychology, and competitive landscape to determine if discounts make sense. Discounts should be gradual, targeted, and supported by data.
With the right balance, promotions can add value without conditioning customers to wait for sales. But ultimately, sustainable branding is built on conveying worth beyond price alone.